Note 2 — Stock-Based Compensation Expense

In May 2012, the Company’s 2003 Equity Incentive Plan was amended to increase the number of shares available for new awards to a total of 25 million, of which 15 million shares were available for restricted stock and/or restricted stock units (“RSUs”). In addition, the period during which incentive stock options can be granted was extended to February 9, 2022, and the maximum number of shares that may be issued upon exercise of incentive stock options was set at 25 million.

Stock-based compensation expense included in continuing operations, net of estimated forfeitures, related to the Company’s stock options, Employee Stock Purchase Plan (“ESPP”) and restricted stock unit awards by expense category was as follows:


	Three Months Ended				Nine Months Ended
	September 30, 2012		October 2, 2011		September 30, 2012		October 2, 2011
	(In thousands)
Cost of revenues	$	2,573	$	1,460	$	9,088	$	5,324
Research and development		11,170		5,410		35,451		18,286
Selling, general and administrative		13,643		4,883		38,999		15,462

Total stock-based compensation expense	$	27,386	$	11,753	$	83,538	$	39,072

In connection with the SandForce acquisition, the Company assumed stock options and RSUs originally granted by SandForce. Stock-based compensation expense for the nine months ended September 30, 2012 included $4.5 million of expense related to the accelerated vesting of stock options and RSUs for certain SandForce employees in January 2012. Stock-based compensation expense for the three and nine months ended September 30, 2012 also includes $3.1 million and $8.8 million, respectively, related to assumed stock options and RSUs.

Stock Options

The fair value of each option grant is estimated as of the date of grant using a reduced-form calibrated binomial lattice model (“lattice model”). The following table summarizes the weighted-average assumptions that the Company applied in the lattice model:


	Three Months Ended						Nine Months Ended
	September 30, 2012			October 2, 2011			September 30, 2012			October 2, 2011
Estimated grant date fair value per share	$	2.50		$	2.37		$	2.84		$	2.14
Expected life (years)		4.46			4.48			4.46			4.51
Risk-free interest rate		1	%		1	%		1	%		2	%
Volatility		52	%		50	%		47	%		47	%

The following table summarizes changes in stock options outstanding:


	Number of Shares			Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
	(In thousands)					(In years)		(In thousands)
Options outstanding at December 31, 2011		64,245		$	6.19		0		0
Assumed in SandForce acquisition		7,542		$	0.75		0		0
Granted		5,389		$	8.40		0		0
Exercised		(14,385	)	$	5.32		0		0
Canceled		(4,758	)	$	8.69		0		0

Options outstanding at September 30, 2012		58,033		$	5.70		3.91	$	102,654

Options exercisable at September 30, 2012		35,670		$	6.13		2.71	$	52,025

As of September 30, 2012, the total unrecognized compensation expense related to unvested stock options, net of estimated forfeitures, was $40.9 million and is expected to be recognized over the next 2.2 years on a weighted-average basis. The options assumed in the SandForce acquisition vest over four years from the date of the grant and have ten year terms.

Restricted Stock Units

The cost of service-based and performance-based RSUs is determined using the fair value of the Company’s common stock on the date of grant. For performance-based RSU expense, the Company also considers the probability that those RSUs will vest.

Service-based:

The vesting of service-based RSUs requires that the employees remain employed by the Company for a specified period of time.

The following table summarizes changes in service-based RSUs outstanding:


	Number of Units			Weighted-Average Grant Date Fair Value per Share
	(In thousands)
Unvested service-based RSUs outstanding at December 31, 2011		12,085		$	5.94
Assumed in SandForce acquisition		1,576		$	6.17
Granted		7,921		$	8.23
Vested		(3,315	)	$	5.87
Forfeited		(782	)	$	6.53

Unvested service-based RSUs outstanding at September 30, 2012		17,485		$	6.98

As of September 30, 2012, the total unrecognized compensation expense related to service-based RSUs, net of estimated forfeitures, was $94.6 million and will be recognized over the next 2.8 years on a weighted-average basis.

Performance-based:

The vesting of performance-based RSUs is contingent upon the Company meeting specified performance criteria and requires that the employees remain employed by the Company for a specified period of time.

The following table summarizes changes in performance-based RSUs outstanding:


	Number of Units			Weighted-Average Grant Date Fair Value per Share
	(In thousands)
Unvested performance-based RSUs outstanding at December 31, 2011		4,729		$	5.98
Granted		2,986		$	8.52
Vested		(1,446	)	$	5.85
Forfeited		(593	)	$	6.53

Unvested performance-based RSUs outstanding at September 30, 2012		5,676		$	7.29

As of September 30, 2012, the total unrecognized compensation expense related to performance-based RSUs, net of estimated forfeitures, was $19.8 million and, if the performance conditions are fully met, will be recognized over the next 3 years.

Employee Stock Purchase Plan

Compensation expense for the ESPP is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. Under the ESPP, rights to purchase shares are granted during the second and fourth quarters of each year. The Company issued 2.8 million and 2.9 million shares under the ESPP during the three months ended July 1, 2012 and July 3, 2011, respectively. No shares related to the ESPP were issued during the three months ended September 30, 2012 or October 2, 2011. The following table summarizes the weighted-average assumptions that the Company applied in the calculation of the fair value for the May 2012 and May 2011 grants:


	2012			2011
Estimated grant date fair value per share	$	2.19		$	2.10
Expected life (years)		0.8			0.8
Risk-free interest rate		0.17	%		0.02	%
Volatility		41	%		37	%